Starting a business with family members or a collection of close friends always seems like a good idea at first. But both success and adversity can lead to contentious disputes over control and ownership of the business.
Sometimes these disputes manifest themselves in the form of the majority shareholders “oppressing” the rights of minority shareholders.
The most common form of oppressive conduct in the context of a close corporation is the “freezing-out [of] a minority shareholder by removing him from his various offices or by substantially diminishing his power or compensation.” Determining whether oppression has occurred is often fact, and time, intensive. Therefore, from the outset, shareholders on both sides of the dispute should be mindful of the potential remedies available to an oppressed minority shareholder when formulating a litigation strategy.
Under Pennsylvania law, courts have discretion to impose a broad array of statutory and equitable remedies in oppression cases. The overriding principle in awarding relief in these cases is to restore the minority shareholder’s “reasonable expectations.”
The Pennsylvania Business Corporation Law (“BCL”) provides a statutory basis for (i) dissolving the corporation and distributing assets to the shareholders or (ii) appointing a custodian to take control of the corporation. However, these statutory remedies, particularly dissolution, are perceived as “extraordinary measures.” Dissolution, in particular, is not likely to be ordered unless the business has “been imperiled by the hostility among the shareholders.”
Given the reluctance to impose the available statutory remedies, courts, through their exercise of equity jurisdiction, frequently fashion alternative remedies.
Some specific examples of equitable remedies in oppression cases include:
- Forcing a buyout of the minority shareholder’s interest;
- Ordering an accounting by the majority for funds alleged to have been misappropriated;
- Enjoining future acts of oppression;
- Ordering the declaration of a dividend or a reduction and distribution of capital; and
- Authorizing minority shareholders to purchase additional stock under specific conditions.
Despite the wide latitude to fashion an appropriate remedy, “[t]he most common remedy for oppression…is a buyout of the oppressed investor’s stockholdings.”
When ordering a buyout, the proper valuation for the shares is often hotly disputed. These disputes are frequently framed as whether the court should order redemption at “fair value” or “fair market value.”
“‘Fair value’ refers to the value of stock not as a commodity, but as a proportionate share of the enterprise as a whole.” Fair value does not take into account any minority discount. “Fair market value,” on the other hand, “is the amount for which the stock would sell in the open market, and, in the case of closely held corporations, usually includes a minority discount for noncontrolling shares.”
“Courts have ordered majority shareholders to buy out a minority shareholder’s interest using [fair] value where the minority shareholder was forced to relinquish his ownership position in the company by the majority’s oppressive conduct and, absent threat of dissolution or other judicial sanction, the majority was an unwilling buyer. Where these facts are not present, fair market value is the appropriate valuation of the minority interest.”
Significantly, in appropriate circumstances, these equitable remedies, including a forced buyout, can be ordered in conjunction with an award of compensatory damages for injuries suffered due to specific instances of oppressive conduct.
Navigating a heated dispute among shareholders in a closely-held business can be emotionally and financially fraught. Understanding your rights and remedies, as either a majority or minority shareholder, is imperative to reaching a satisfying outcome. The experienced litigators in our Complex and Commercial Business Litigation Group are here to help.
- Adler v. Tauberg, 881 A.2d 1267, 1269 (Pa. Super. Ct. 2005) (internal marks and citation omitted).
- See 15 Pa. C.S.A § 1767(a)(2).
- Orchard v. Covelli, 590 F. Supp. 1548, 1560 (W.D. Pa. 1984).
- Cochran v. L.V.R. & R.C., Inc., No. M2004-01382-COA-R3-CV, 2005 WL 2217067, at *6 (Tenn. Ct. App. Sept. 12, 2005).
- Douglas K. Moll, Shareholder Oppression and “Fair Value”: Of Discounts, Dates, and Dastardly Deeds in the Close Corporation, 54 Duke L.J. 293, 319-20 (2004).
- Northern Air Servs., Inc. v. Link, 809 N.W.2d 900 (Wis. Ct. App. Jan. 19, 2012).
- Argo Data Resource Corp. v. Shargrithaya, 380 S.W.3d 249, 271 (Tex. App. Aug. 29, 2012) (citing Ritchie v. Rupe, 339 S.W.3d 275, 300 (Tex. App. 2011)).
- See Kulko v. Davail, Inc., 363 P.3d 430, 435 (Mont. 2015).